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The author is head of policy research at Algebris Investments
Does the success of far-right politics threaten the European economy and its attractiveness to international investors?
That’s the question investors seem to be asking following the landslide victory of Marine Le Pen’s far-right Rassemblement National in European elections, French President Emmanuel Macron’s surprise call for early elections and shocking news of an unlikely alliance between the parties. The French Left.
The Cac 40 slumped to its worst week in two years after the election announcement, erasing much of the year’s gains, while bond yields jumped. The spread between French and German bond yields widened to levels not seen in seven years. Meanwhile, the French finance minister has warned that France is heading for a financial crisis.
It would be extreme to conclude that France is on the brink of economic disaster, and it would be wrong to assume serious ripple effects across the continent. However, there are risks at national and EU level that could have long-term consequences for companies and markets.
France experienced a violent reaction. In the immediate aftermath of the surprise policy decision, investors went into risk-free mode while they digested the fallout. However, if the election shows a strong performance for the left, we are likely to see further selling of French assets. Both far-right and far-left platforms call for the reversal of Macron’s reforms and contain populist promises that are difficult to reconcile with EU fiscal rules. A strong left would also signal a particularly worrying anti-business and anti-growth Eurosceptic shift. Herein lie the real risks for France.
Since the European Parliament election results, many have drawn parallels between France and Italy under Prime Minister Giorgio Meloni, arguing that her right-wing party has not been overly negative for Italian business and the economy. However, this is not the most appropriate comparison.
The situation is more analogous in Italy in 2018, when the elections brought an unlikely coalition of two populist parties. The Italian government in 2018 was held together by a mutual dislike of Brussels and collapsed after less than a year. Yet it lived long enough to start a spat with the European Commission over the national budget, leading to an increase in Italy’s government debt spread.
Financial markets are effective in being the judge, jury and executioner of governments with reckless spending plans and can apply the brakes. The UK under Prime Minister Liz Truss is another great example, and market movements over the past week suggest that investors may be starting to appreciate the risk of a similar scenario in France.
At the EU level, the risk of a Eurosceptic France is compounded by the risk of a weak Germany. Chancellor Olaf Scholz’s dismal election result will weaken the German government for the rest of its term at home and on the European stage. The strong “Franco-German engine” of integration could therefore run out of steam, leaving space for the right to set the agenda.
While the right has abandoned calls to leave the bloc after Brexit, its vision of Europe is different. Europe-wide polls show that climate policies are not a priority for right-wing voters, who favor a greater focus on defence. A strengthened European right could seize the opportunity of revision clauses in the Green Deal and delay or limit some provisions. In addition to being clearly bad for the planet, this could reduce Europe’s attractiveness as a destination for green investment.
From an investor perspective, the key battles to watch in the short term will be over the next EU budget, including the move to the EU’s “next generation” spending plan and the EU’s own resources. Given this uncertainty, global investors may be less inclined to take European risk.
Macron warned in a recent speech that Europe is dying and its survival depends on our choices. His choice so far has put France under pressure. I don’t think the rise of populism necessarily poses a mortal economic threat to either the EU or France, although history suggests it promises volatility and may discourage investment.
The risk to Europe is more subtle. The European elections have revived the narrative of a fractured Europe, where socio-economic views appear to be moving against the EU’s political priorities. It is the choices Europe makes to mend this deeper rift and address the root cause of the far right’s success that will truly shape its future.